Sarah Coles, head of personal finance at AJ Bell, examines why steady inflation in May should not be mistaken for a return to comfort, with households still facing sharp price rises across essentials from fuel to food.
Sarah Coles, head of personal finance at AJ Bell, comments:
“Inflation held steady in May, as fuel price rises were offset by heating oil prices falling back after a peak, and falling food inflation. You might be tempted to breathe a sigh of relief at this stage.
“The US-Iran peace deal this week has brought the oil price down, so it’s now at just $77 a barrel. If the deal holds, it should ease some inflationary pressures in the months to come. However, there are five things you need to know about May’s inflation figures that could still spell bad news for your finances.
1. There are some serious price rises in there
“Fuel prices were unsurprisingly the biggest risers in May – with overall motor fuel prices up 24.6% in a year. To add insult to injury, parking and toll price inflation rose to 6.2%. Heating oil inflation fell back, but the rises are still eyewatering. It may be down from 129.6% last month, but it’s still 95.6% – so it has almost doubled in a year.
“Broadband inflation held steady, but is still up 12.1% in a year, and ‘petflation’ (the rising price of buying pets) was also steady – but is up 20.8% in a year.
“Many of the toughest food price hikes have eased, but they’re still far more expensive than this time last year – including beef and veal up 9.4%, fresh fish up 7.8%, whole milk up 7.2% and confectionary up 8.8%.
2. The cumulative effects can’t be ignored
“Some prices will rise and fall as the months pass, including petrol prices, some supermarket staples, and clothes that are put on sale. However, in many cases, prices will be permanently higher, so a couple of months of lower inflation doesn’t cancel out the damage that has already been done.
“The Institute of Grocery Distribution says that food prices could be up around 40% since the pandemic, while HSBC says the average cost of package holidays is up by at least 30% in that time. It means we need to keep an eye on rising prices, and if pay isn’t keeping pace, we may need to take action. In some cases it will mean trimming spending, but some people will need to make more painful decisions.
3. This isn’t the end of higher inflation
“The US-Iran peace deal, the movement of oil through the Strait of Hormuz, and an oil price back down to $77 a barrel, are all likely to mean lower direct inflationary effects of the higher price of energy. However, there are no guarantees that the deal will hold, and even if peace endures, price rises are already baked in through higher input costs.”
“The Bank of England forecasts that inflation will build through the summer and into the autumn, largely through higher food costs and the cost of services. The Institute of Grocery Distribution has said that food inflation will peak in the second half of 2026. It means inflation could get worse before it gets better.
4. It’s going to hit those on lower incomes particularly hard
“Those with lower incomes tend to spend a bigger proportion of their income on some of the things that are most affected by the cost of higher energy.
“The ONS Family Spending figures out last week showed that the 20% of households with the lowest disposable income spent 15.2% of their budget on food and drink – compared to 7.9% among the highest 20%. They also spent 7.8% on gas and electricity, compared to 3.9% among the richest fifth, and 2.5% on petrol, diesel and motor oils, compared to 2.1%.
5. There’s bad news for savers on the horizon
“Inflation is miserable news for savers, because it eats away at the spending power of their savings. Usually, it comes with the upside that the Bank of England may need to increase interest rates to fight inflation, which tends to push savings rates up and may help savers keep pace. However, after the peace deal this is looking less likely.”
“In the middle of last week, markets were pricing in two interest rate hikes by early 2027. Now they’re pricing in the possibility of just one by December and then potentially no change for at least the first half of 2027. It means we’re likely to see fixed rate savings fall. With inflation at 2.8%, you might not feel this is a priority. However, with inflation set to rise and rates to fall, you could be grateful for locking in a better rate now.
“It’s also why, if you have money that you don’t need for five to 10 years or more, it’s well worth considering whether you can invest at least some of your portfolio, so you can benefit from more potential growth.
“For money you need within the next five years – but not for the next year or so – you could consider a fixed rate savings account. Decent competition in the savings market means you can get 4.85% if you fix for a year – so there’s a strong chance you could beat inflation in the most competitive accounts, even after it starts to rise. These deals are likely to fade fairly quickly though, so if you’re considering a fix, it might be worth acting fast.”
